Conventional retirement planning has long advocated for a specific withdrawal sequence: deplete taxable brokerage accounts first, then tax-deferred accounts like 401(k)s and traditional IRAs, and finally, tax-free Roth accounts.

The logic is to prolong tax-deferred growth for as long as possible. However, for a growing cohort of affluent and high-net-worth (HNW) retirees, this doctrine is not just suboptimal—it is a high-risk strategy that can lead to significantly higher lifetime tax bills and reduced net wealth.

This report deconstructs the latent risks of unchecked tax deferral and presents a superior, proactive approach: strategically drawing down tax-deferred accounts first.

Deconstructing the Conventional Wisdom: The Latent Risks of Tax Deferral

The traditional approach to retirement withdrawals is rooted in a simple and seemingly powerful idea: let tax-advantaged accounts grow for as long as possible. While this strategy can be effective for some, for affluent retirees with significant assets, it often masks a series of interconnected risks that can dramatically erode wealth in the later stages of retirement.

1.1 The Tax-Deferral Paradox: When a Benefit Becomes a Liability

The standard decumulation hierarchy advises retirees to spend down their assets in a specific order: first, taxable accounts (e.g., brokerage accounts); second, tax-deferred accounts (e.g., 401(k)s, traditional IRAs); and third, tax-free accounts (e.g., Roth IRAs). The underlying theory is that this sequence maximizes the benefits of tax-deferred and tax-free growth, postponing large tax bills for as long as possible.   

For retirees with substantial balances in tax-deferred plans—a common scenario for diligent savers who have maximized contributions over decades—this strategy presents a paradox. The very benefit of tax deferral, which allows for decades of untaxed compound growth, eventually transforms into a significant liability. The strategy does not eliminate the tax bill; it merely postpones and concentrates it into the later years of retirement.

1.2 The Inevitable Collision: The RMD “Tax Time Bomb”

The mechanism that triggers this tax bomb is the Required Minimum Distribution (RMD). The IRS mandates that individuals begin taking annual withdrawals from all tax-deferred retirement accounts—including 401(k)s, 403(b)s, and traditional, SEP, and SIMPLE IRAs—starting at age 73. Roth IRAs are notably exempt from RMDs for the original account owner.   

The RMD calculation is straightforward and unforgiving: the account balance as of December 31 of the preceding year is divided by a life expectancy factor from the IRS’s Uniform Lifetime Table. For example, a 75-year-old with a $2 million IRA would have a distribution period of 24.6, forcing a withdrawal of approximately $81,300. This entire amount is treated as ordinary income and taxed at the retiree’s marginal rate. The penalty for failing to take the full RMD is severe: a 25% excise tax on the amount not withdrawn, which can be reduced to 10% if corrected in a timely manner.   

1.3 The Stealth Tax: How RMDs Trigger Medicare IRMAA Surcharges

The financial damage from a large RMD extends beyond the initial income tax. It also triggers a significant “stealth tax” in the form of the Income-Related Monthly Adjustment Amount (IRMAA). IRMAA is a surcharge that higher-income beneficiaries must pay on top of their standard Medicare Part B (medical insurance) and Part D (prescription drug) premiums.   

Critically, the surcharge is determined by a retiree’s Modified Adjusted Gross Income (MAGI) from their tax return two years prior. For example, 2025 IRMAA surcharges are based on 2023 MAGI. Since withdrawals from 401(k)s and traditional IRAs are included in Adjusted Gross Income (AGI), a large RMD directly increases a retiree’s MAGI.   

1.4 The Inefficiency of Wasted Deductions and Low Tax Brackets

A final, critical flaw in the “taxable-first” approach is its inherent inefficiency during the early years of retirement. By drawing income primarily from taxable brokerage accounts—which generate preferentially taxed long-term capital gains and qualified dividends—and tax-free Roth accounts, a retiree’s taxable ordinary income can be extremely low.

While this sounds appealing, it often means the retiree fails to utilize valuable tax deductions and lower tax brackets. As detailed in Table 1, for the 2025 tax year, a married couple filing jointly receives a standard deduction of $30,000. Their first $23,850 of taxable income is taxed at only 10%, and income up to $96,950 is taxed at just 12%.

A strategy that results in near-zero ordinary income effectively “wastes” this space in the tax code. Any financial plan that allows valuable deductions and low tax brackets to go unused is fundamentally inefficient, leaving significant tax savings on the table.¹ This inefficiency sets the stage for the proactive strategy of deliberately “filling” these brackets with income from tax-deferred accounts.

The Strategic Imperative: A Proactive Approach to Tax-Deferred Accounts

Recognizing the significant flaws of the conventional withdrawal sequence, a more sophisticated strategy has emerged for affluent retirees. This approach inverts the traditional hierarchy, prioritizing withdrawals from tax-deferred accounts to gain control over a lifetime of tax liabilities.

2.1 The Core Principle: Lifetime Tax Rate Smoothing

The primary objective of the “401(k)-first” strategy is not to achieve the lowest possible tax bill in any single year, but rather to achieve the lowest cumulative tax bill over the entire multi-decade retirement horizon. This principle, known as lifetime tax rate smoothing, involves proactively managing taxable income to avoid the sharp “tax bump” that occurs when RMDs begin.

Instead of allowing tax-deferred accounts to grow unchecked until age 73, this strategy involves systematically making withdrawals from 401(k)s and traditional IRAs in the early years of retirement. The goal is to strategically “fill up” the lower tax brackets—the 10%, 12%, and even the 22% brackets—with this income each year.

2.2 The “Gap Years” Opportunity (Ages 60-72)

The ideal window for implementing this strategy is during the “gap years”—the period between the date of retirement (when earned income from a primary career ceases) and the start of RMDs at age 73. For many HNW individuals, these years represent a unique, temporary valley in their lifetime taxable income.

This period presents a limited-time opportunity to engineer their tax outcome. By withdrawing funds from tax-deferred accounts, they can realize income at what will likely be the lowest marginal tax rates they will ever face again. It is crucial to understand that this strategy is not primarily about funding consumption. It is an asset repositioning maneuver.

The money withdrawn from a pre-tax 401(k), after taxes are paid, can be moved to a taxable brokerage account. In this new location, all future growth in the form of long-term capital gains and qualified dividends will be taxed at more favorable rates (0%, 15%, or 20%) instead of being taxed as ordinary income.

2.3 The Social Security “Bridge” Strategy

A particularly powerful application of the “401(k)-first” principle is the Social Security “bridge” strategy.¹⁷ This involves using withdrawals from tax-deferred accounts to cover living expenses during early retirement, thereby enabling the retiree to delay claiming Social Security benefits until age 70.

The financial incentive for delaying Social Security is substantial. For each year of delay beyond an individual’s full retirement age, their benefit increases by approximately 8%, up to age 70. This locks in a significantly higher, inflation-adjusted, government-guaranteed income stream for the rest of their life. This strategy creates a powerful synergistic effect. The 401(k) withdrawals provide the necessary cash flow to bridge the income gap in early retirement.

2.4 Illustrative Scenario Analysis: The Tale of Two Retirees

To quantify the impact of these competing strategies, consider a hypothetical scenario involving two identical households, each retiring at age 65 with a $2 million traditional IRA, a $500,000 taxable brokerage account, and a $250,000 Roth IRA. Both households require $100,000 per year in after-tax income.

Household A (The Conventionalist): This household adheres to the traditional “taxable-first” withdrawal strategy. They fund their retirement by drawing from their taxable account until it is depleted, then their traditional IRA, and finally their Roth IRA. They claim Social Security at their full retirement age of 67. In their early retirement years, their taxable income is very low, consisting mainly of capital gains. However, once RMDs begin at age 73, their income skyrockets. The large, forced withdrawals from their now-larger IRA, combined with Social Security, push them into high tax brackets and trigger significant IRMAA surcharges for the remainder of their lives.

Household B (The Strategist): This household employs the proactive “401(k)-first” approach. From ages 65 to 70, they use withdrawals from their traditional IRA to fund their living expenses, allowing them to delay Social Security until age 70. They carefully manage these withdrawals to fill the 12% and 22% tax brackets each year. By the time RMDs begin at age 73, their traditional IRA balance is substantially lower than Household A’s. Consequently, their mandatory RMDs are smaller, their total taxable income is lower and more stable, and they largely avoid the higher IRMAA surcharges. Their larger, delayed Social Security benefit provides a secure, tax-efficient income base.

A projection over a 25-year retirement reveals a stark difference in outcomes. As summarized in Table 3, the Strategist household pays significantly less in total lifetime taxes and IRMAA surcharges. This results in higher net retirement income and a larger final estate value to pass on to their heirs. The analysis provides clear, quantitative proof that for affluent retirees, proactive tax management is superior to passive tax deferral.

An Integrated Toolkit for Advanced Decumulation Planning

The “401(k)-first” philosophy is not a single action but a comprehensive approach supported by a toolkit of sophisticated financial strategies. When used in concert, these tools allow retirees to precisely engineer their taxable income, minimize lifetime tax liabilities, and align their financial plan with their philanthropic and legacy goals.

3.1 Strategic Roth Conversions: Paying Taxes on Your Own Terms

A Roth conversion is the process of transferring funds from a pre-tax account (like a traditional IRA or 401(k)) to a post-tax Roth IRA. The amount converted is treated as ordinary income and taxed in the year of the conversion. This strategy is the ultimate expression of proactive tax management, as it involves voluntarily paying taxes today to secure tax-free growth and withdrawals in the future.

3.2 Philanthropy as a Tax Shield: Qualified Charitable Distributions (QCDs)

For charitably inclined retirees aged 70½ and older, the Qualified Charitable Distribution (QCD) is an exceptionally powerful tax-planning tool. A QCD allows an individual to donate up to $108,000 (in 2025) directly from their IRA to a qualified charity.   

The primary tax advantage of a QCD is that the distributed amount can satisfy all or part of that year’s RMD, but it is excluded from the retiree’s AGI. This is far more beneficial than donating cash and taking an itemized deduction, particularly as the higher standard deductions introduced by the Tax Cuts and Jobs Act mean fewer retirees itemize their deductions. By directly lowering AGI, a QCD not only reduces the retiree’s income tax liability but can also be instrumental in keeping them below a critical IRMAA income threshold, thus preventing a costly increase in Medicare premiums.   

3.3 Foundational Portfolio Strategy: The Principle of Asset Location

An effective withdrawal strategy must be built upon a foundation of intelligent portfolio design. The principle of “asset location” dictates which types of assets should be held in which types of accounts to maximize tax efficiency. A poorly structured portfolio can undermine even the best-laid withdrawal plans. The optimal structure is as follows:   

Taxable Accounts (e.g., Brokerage): These accounts should hold the most tax-efficient investments, such as individual stocks, index funds, and ETFs. This allows growth to be taxed at the lower long-term capital gains rates. These accounts are also the only place where tax-loss harvesting—selling losing investments to offset gains—is possible.   

Tax-Deferred Accounts (e.g., 401(k)s, Traditional IRAs): These accounts are best suited for tax-inefficient assets. This includes investments that generate regular taxable income, such as corporate bonds, high-turnover actively managed mutual funds, and REITs. Since all withdrawals from these accounts will eventually be taxed as ordinary income regardless of the source, it makes sense to shield these tax-inefficient assets from annual taxation within the tax-deferred wrapper.   

Tax-Free Accounts (e.g., Roth IRAs, HSAs): These accounts should hold assets with the highest potential for long-term growth. Since all qualified withdrawals are completely tax-free, this is the ideal location for aggressive growth stocks or funds, ensuring that the most significant gains are never taxed.   

Proper asset location ensures that each account type is leveraged to its maximum tax-advantaged potential, creating a more efficient foundation from which to execute a sophisticated withdrawal strategy.

Critical Variables and Long-Term Considerations

A truly comprehensive decumulation plan must account for variables beyond federal income tax and portfolio structure. State tax laws, evolving estate planning rules, and market volatility all introduce layers of complexity that require a dynamic and personalized approach.

4.1 The State Tax Mosaic: A Layer of Complexity

State income tax laws can significantly impact the net outcome of a retirement withdrawal strategy. The tax treatment of retirement income varies dramatically across the country, creating a complex mosaic that must be factored into any decision. States generally fall into one of three categories:

No Income Tax States: States like Florida, Texas, Nevada, and Wyoming levy no state income tax at all, offering the most favorable environment for retirement withdrawals.

Tax-Friendly States: Some states, while having an income tax, provide generous exemptions for retirement income. Illinois, Mississippi, and Pennsylvania, for example, exempt most 401(k), IRA, and pension distributions from state tax.

High-Tax States: Other states, such as California, New York, and Nebraska, tax most forms of retirement income as ordinary income and have high marginal rates, which can significantly increase the total tax burden on withdrawals.

Living in a high-tax state can amplify the benefits of the “401(k)-first” strategy, as it allows for the simultaneous management of both federal and state tax brackets. Conversely, for those with geographic flexibility, relocating from a high-tax state to a no-tax or tax-friendly state can be a powerful strategic move in itself, effectively eliminating one entire layer of taxation on retirement income.

4.2 Legacy Planning in the Post-SECURE Act Era

The SECURE Act of 2019 and its successor, SECURE 2.0, fundamentally reshaped the landscape of legacy planning for retirement accounts. The most significant change was the elimination of the “stretch IRA” for most non-spouse beneficiaries. Previously, a beneficiary could “stretch” distributions from an inherited IRA over their own life expectancy, allowing the account to continue growing tax-deferred for decades.

Under the new regime, most non-spouse beneficiaries (such as adult children) must withdraw the entire balance of the inherited account within 10 years following the original owner’s death. This forces a large amount of taxable income upon the beneficiaries during what are often their peak earning years. Consequently, leaving a large pre-tax IRA or 401(k) is no longer a tax-efficient multi-generational wealth transfer tool; it is a significant tax liability for the next generation.

4.3 Navigating Market Volatility: Dynamic vs. Static Withdrawals

A key risk for any retiree is “sequence-of-returns risk”—the danger of experiencing poor market returns in the early years of retirement. Withdrawing a fixed amount from a portfolio during a market downturn can lock in losses and permanently impair the portfolio’s ability to sustain income for the long term.

The “401(k)-first” strategy must be implemented with this flexibility in mind. In a year with strong market returns, a retiree might execute a larger-than-usual Roth conversion. Conversely, in a year with a significant market downturn, they might choose to do a smaller conversion or draw more heavily from their cash reserves or taxable account to avoid selling depreciated assets within their tax-deferred accounts.

Conclusion: Architecting a Personalized, Tax-Intelligent Retirement Income Plan

The evidence and analysis presented in this report lead to a clear conclusion: for affluent retirees with substantial tax-deferred savings, the conventional “taxable-first” withdrawal strategy is a flawed and high-risk approach. By passively allowing tax-deferred accounts to grow, this method defers and dangerously concentrates tax liabilities, leading to a loss of control and exposure to higher tax rates, Medicare surcharges, and a less efficient transfer of wealth to the next generation.

A superior doctrine, centered on proactive tax-bracket management and lifetime tax smoothing, offers a more strategic path. By deliberately tapping 401(k)s and traditional IRAs in the low-income “gap years,” retirees can seize control of their financial destiny. This approach allows them to pay taxes on their own terms at known, lower rates, effectively defusing the RMD “tax time bomb.” When integrated with a toolkit of advanced strategies—including the Social Security bridge, strategic Roth conversions, Qualified Charitable Distributions, and proper asset location—this philosophy minimizes lifetime tax burdens, mitigates the risk of future tax hikes, and facilitates a more tax-efficient legacy.